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How Confident are You?

Dec 11, 2012
Chad Karnes, CMT

Consumer Confidence in November hit a new 4 year high. Historically, however it remains deeply depressed and still in unhealthy territory.

The chicken or the egg, which came first? 

Just like this well known philosophical question, does consumer confidence lead to more spending (NYSEARCA:XLY) or does more spending lead to confidence?  On 11/27, the Consumer Conference Board’s gauge of sentiment hit a four year high and Wall Street (NYSEARCA:SPY) was ecstatic.

“A sign U.S. household spending will keep growing. Americans continued to shake off fears of the looming fiscal cliff. Consumers (NYSEARCA:XLP) have grown increasingly more upbeat.” 

The media sure loved the November number and Americans are now confident as ever! 

Well, not really. 

Although consumer confidence rose in November to the highest level in more than four years, as with most statistics the onion needs to be peeled back.

Like many fundamentals, the consumer confidence surveys are more coincidental than leading.  When times are good, respondents and data are more positive and during bad times more negative. 

Lies, Damn Lies, and Statistics: Part 1

The conference board’s index value of 73.7 is an improvement of .6 points from October and is also the highest level since Feb 2008.  This is all true and indeed positive on the surface.

Here is the first rub. 

The level above 90 is what is considered a healthy economy.  Of the 10 news articles returned in a web search on the index results, only one source admitted to this key detail.  All others of course painted rosier pictures.

Can you guess the last time a level of 90 actually occurred…near the market’s (NYSEARCA:IVV) previous top in December 2007.  The index is only at 73.7 today and well below the level of “healthy”, but of course that gets lost in the media shuffle. 

Consumers (NYSEARCA:VDC) aren’t even close to being as confident as they were at the last stock market peak in 2007 even though the stock market (NYSEARCA:VTI) has now rallied four years and sits back at December 2007 levels.  The Conference Board’s survey high during the year 2007 peak reached 110, 50% higher than today’s levels.

What about the all time survey high?  Back in the year 2000 it reached 140.  Confidence would need to double from here to get back to that level and helps show how weak this recovery really is.   

How about a Second Opinion?

The next rub occurred more recently, when the Michigan Sentiment Survey released less than two weeks later on 12/7 fell significantly month over month to 74.5 also from a previous 4 year high of 82.7.

The consumer confidence (NYSEARCA:VCR) household survey increased the last week of November and the Michigan Sentiment Survey then decreased significantly 10 days later.

Are consumers really that fickle?  Sounds like we need new “surveying” processes.

The Final Rub

Digging into the statistics, the data gives us a lot of good information.  For one, the survey breaks out the different questions such as employment expectations (NYSE:RHI), vehicle purchases (NYSEARCA:IYT), and home appliance (NYSE:HD) purchase expectations.  It really does provide a lot of details.

We also get information based on household earnings and here lies the final rub.  It seems that one specific group of constituents was the driving factor in the survey’s results.

“Confidence among households earning $50,000 and higher slipped to 88 from 91.7 in October”. But among the poorest households, those earning less than $15,000, confidence jumped to 56.2 from 50.2”.

The confidence index actually dropped for the half of American households that make over $50,000, but yet the index rises because of the 12% jump in the 14% of households making less than $15,000. 

As with most coincidental indicators, relying on these fickle indices to make investment decisions is likely to lead you down the wrong path.  We chalk it up as just more noise escalated by the media.

The continued lack of confirmation by the lagging consumer during the four year market rally to us is just another sign that the market continues to be ahead of itself fundamentally.  Consumer (and business) confidence is lagging the market's rally and that divergence is a warning sign.

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